INDIAN INCOME TAX 5 -- INCOME FROM CAPITAL GAINS

Income from capital gains

Transfer of capital assets results in capital gains.

A Capital asset is defined under section 2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects.

Transfer has been defined under section 2(47) to include sale, exchange, relinquishment of asset extinguishment of rights in an asset, etc. Certain transactions are not regarded as 'Transfer' under section 47.

Computation of Capital Gains:-

Full value of consideration1	xxx
Less:Cost of acquisition2	(xx)
Less:Cost of improvement2	(xx)
Less:Expenditure pertaining to transfer incurred by the transferor	(xx)

¹ In case of transfer of land or building, if sale consideration is less than the stamp duty valuation, then such stamp duty value shall be taken as full value of consideration by virtue of Section 50C. The transferor is entitled to challenge the stamp duty valuation before the Assessing Officer.

² Cost of acquisition & cost of improvement shall be indexed in case the capital asset is long term.

For tax purposes, there are two types of capital assets:

(1). Long term and

(2). Short term.

Transfer of long term assets gives rise to long term capital gains.

The benefit of indexation is available only for long term capital assets. If the period of holding is more than 36 months, the capital asset is long term, otherwise it is short term.

However, in the below mentioned cases, the capital asset held for more than 12 months will be treated as long term:-

• Any share in any company
• Government securities
• Listed debentures
• Units of UTI or mutual fund, and
• Zero-coupon bond

Also, in certain cases, indexation benefit is not be available even though the capital asset is long term.

Such cases include depreciable asset (Section 50), Slump Sale (Section 50B), Bonds/debentures (other than capital indexed bonds) and certain other express provisions in the Act.

There are different scheme of taxation of long term capital gains. These are:

1. As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions where STT is not paid.
2. In case of other shares and securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The cost inflation index rates are released by the I-T department each year.
3. In case of all other long term capital gains, indexation benefit is available and tax rate is 20%.

All capital gains that are not long term are short term capital gains, which are taxed as such:

• Under section 111A, for shares or mutual funds where STT is paid, tax rate is 10% from Assessment Year (AY) 2005-06 as per Finance Act 2004. With effect from AY 2009-10 the tax rate is 15%.
• In all other cases, it is part of gross total income and normal tax rate is applicable.

For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid).

Besides exemptions under section 10(33), 10(37) & 10(38) certain specific exemptions are available under section 54, 54B, 54D, 54EC, 54F, 54G & 54GA.

	Section 54	Section 54B	Section 54D	Section 54EC	Section 54F	Section 54G	Section 54GA	Section 54GB
Who is eligible to claim exemption	Individual/HUF	Individual	Any person	Any person	Individual/HUF	Any person	Any person	Individual/HUF
Which asset is eligible for exemption	A residential  house property  (long term)	Agricultural land (if used by individual or his parents for agricultural purpose during at least 2 years immediately prior to transfer)	Land/building forming part of an industrial undertaking which is compulsorily acquired by the Government & which is used during 2 years for industrial purposes prior to acquisition	Any long term capital asset	Any long term capital asset (other than house property) provided that on the date of transfer the assessee does not own more than one residential house property	Land/building/plant/ machinery in order to  shift an industrial  undertaking from urban  area to rural area	Land/building/plant/ machinery in order to  shift an industrial  undertaking from urban  area to any Special  Economic Zone	Long-term residential property if transfer takes place between if transfer takes place during April 1, 2012 and March 31, 2017
Which asset should be acquired to claim exemption	Residential  house property	Agricultural land in rural or urban area	Land/building for industrial purpose	Bonds of National Highways Authority of India or Rural Electrification Corporation Limited; Maximum exemption in one financial year is ₹ 5 million	A residential house property	Land/building/plant/ machinery in order to shift undertaking to rural area	Land/building/plant/ machinery in order to shift undertaking to any SEZ	Equity shares in eligible company
What is the time limit for acquiring the new asset	Purchase:  1-year backward  or 2 years  forward; Construction:3 years forward	2 years forward	3 years forward	6 months forward	Purchase: 1-year backward or 2 years forward;Construction:3 years forward	1-year backward or 3 years forward	1-year backward or 3 years forward	Equity shares in an eligible company to be acquired on or before due date of filing return of income as under section 139(1). The eligible company should utilize this amount for the purchase of a new asset within one year from the date of subscription in equity shares
How much is exempt	Investment in the new asset or capital gain, whichever is lower (The new asset should not be transferred within 3 years of its acquisition)	Investment in the new asset or capital gain, whichever is lower (The new asset should not be transferred within 3 years of its acquisition)	Investment in the new asset or capital gain, whichever is lower (The new asset should not be transferred within 3 years of its acquisition)	Investment in the new asset or capital gain, whichever is lower (The new asset should not be transferred within 3 years of its acquisition); The new asset should not be converted into money or any loan/advance should not be taken on the security of the new asset within 3 years from the date of its acquisition	Investment in the new asset÷Net sale consideration×Capital gain; The assessee should not complete construction of another residential house property within 3 years from the date of transfer of original asset nor should he purchase within 2 years from the date of transfer of original asset another house property	Investment in the new asset or capital gain, whichever is lower (The new asset should not be transferred within 3 years of its acquisition)	Investment in the new asset or capital gain, whichever is lower (The new asset should not be transferred within 3 years of its acquisition)	Investment in the new asset × capital gain ÷ net sale consideration. (The exemption is revoked if equity shares are sold/transferred within 5 years from acquisition or the new asset is sold/transferred by the company within 5 years from acquisition)

Disclaimer

In this note, we have attempted to summarise some of the significant aspects to be kept in mind by readers to ensure compliance of Income tax laws and regulations. Readers should ensure to verify specific provisions as applicable to each case before taking any business decisions. It would be pertinent to note that some changes are being made to the Income tax laws and rules and regulations on a continuous basis by way of notifications, clarifications etc issued by the department based on their practical experience in implementing the legislation.

It may be noted that nothing contained in this note should be regarded as our opinion.  Professional advice should be sought for applicability of legal provisions based on specific facts. Though reasonable efforts have been taken to avoid errors or omissions in this note we are not responsible for any liability arising to readers directly or indirectly due to any mis-statements or error contained in this note. It must be noted that the views expressed in the note are based on our understanding of the law and regulations as published by the Government authorities and we may or may not agree or subscribe to such views/ interpretations.